PM Squanders Fiscal Gains

In two days last week, Paul Martin squandered a decade’s effort to put Canada’s public finances in order. You’d think he’d at least exact a big price for this sacrifice. After all, he more than any other single individual can properly claim the credit for having defeated the deficit and put Ottawa on the path of surplus budgets and fiscal redemption. The strategy was risky, but Martin courageously won over public opinion and became the best finance minister in a generation.

Now, under heavy fire from the premiers, who had designs on Ottawa’s hard-won surpluses to finance their out-of-control health spending, Paul Martin did exactly what his predecessors did to land us in our earlier fiscal mess. He is trying to spend his way to popularity. Tens of billions of dollars are to go to the provinces over the next few years, allegedly for health care, but with no real control over where the money goes.

The sad irony in all this is that when he moved to shore up Ottawa’s finances, Paul Martin took aim squarely at transfers to the provinces for health care. In this he was continuing a struggle the feds had been engaged in with the provinces for several decades over health spending.

In the early days of Medicare, Ottawa gave the provinces the famous “50 cent dollars”. For every dollar the provinces spent on health, Ottawa kicked in fifty cents. It was an open-ended federal commitment, so the provinces had every incentive to spend on health and less on many other things. After all, if you spent on health, Ottawa picked up half the tab, which was an almost irresistible lure, and caused many a province to sacrifice what it considered higher priorities on the altar of federal cash.

In the late 1970s Ottawa tried to introduce a little more discipline. Out went the 50 cent dollars. In came Established Program Financing. The provinces got block-funding with relatively few strings attached, plus some extra taxing room.

This put a cap on Ottawa’s cash commitment and made the premiers angry because they had the responsibility of actually delivering health care programs, and none of them wanted to take the political heat for cutting the expansion of health care spending. Thus began the long march upward of the share of provincial spending going on health care.

Thirty years ago, most provinces were spending about 30 per cent of their program spending on health. By sometime in the next decade, every province is expected to be spending over half of its program spending on hospitals, docs and drugs.

But the redefinition of Ottawa’s role in health care financing was not over. As the deficit problem really bit, Ottawa realized that transfers to the provinces had to be cut back again. This time, it was Paul Martin who wielded the knife. The new federal plan, called the Canada Health and Social Transfer, removed the last minor strings on federal transfers to the provinces for social programs (chiefly health, but also welfare and education) but cut the total amount transferred.

The change was a painful one, but one that helped to restore Ottawa to fiscal health. The provinces claim, of course, that this was done at their expense, but this claim is highly exaggerated. At the same time the provinces were pleading poverty, they were also cutting taxes and failing to discipline health spending. In any case, no matter what Roy Romanow says, the health care system’s problem is not a lack of cash (we’ve never spent more on health than we do today). On the contrary, it is poor management and a lack of accountability.

Moreover, powerful producer groups rule the health care system. If you doubt this, just watch the wave of health care worker strikes that the latest infusion of cash is guaranteed to unleash as docs, nurses, administrators and others jockey to capture their share of the new funding. It has happened over and over again in the absence of real reform, and particularly of demanding standards of accountability and real hard performance measures, new cash simply disappears into the system without a trace. And at the rate health spending rises, the premiers will soon be back rallying round their standard battle cry: “It’s not enough.”

In order to shore up his weak political position in a minority parliament, Paul Martin has largely sacrificed the fiscal maneuvering room he himself won for Ottawa in the early nineties. Yet he got no commitments for reform from the premiers, and only token nods in the direction of greater accountability for results. The Prime Minister has largely destroyed his chief legacy as finance minister and got nothing to show for it other than a year or two of peace on the health front.

Like Neville Chamberlain before him, Paul Martin believes that there will be peace in our time. And like Chamberlain, he is likely to be bitterly disappointed.